Don’t Blow the Negotiations With Your Outsource Firm

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The negotiation of outsourcing deals has come a long way. In the early days, providers had a relative advantage over buyers because they were the “repeat players.” By virtue of doing deals with multiple customers, providers developed experience and acquired a real information advantage. Over time, buyers learned that to improve their deal-making, they needed to retain external outsourcing experts, bring experienced procurement professionals to the table or both.

Unfortunately, these experts also brought with them a mindset that tends to define the objective of the negotiation as “doing the deal” and measures their success in terms of how low they can make the provider go. While correcting the imbalance of power and information that used to exist in these negotiations is beneficial, there’s now increasing data that the pendulum has swung too far:

  • Research by Vantage Partners, Cutter Consortium and EquaTerra, suggests that, for buyers and providers alike, the gap in the value achieved between collaborative relationships and contentious ones can be 30 percent of annual contract value.



  • Studies by Booz Allen & Hamilton, Gartner and others suggest that a third or more of outsourcing agreements fail to deliver expected value.



  • According to Simmons & Simmons, the U.K. law firm, roughly 90 percent of outsourcing deals encounter serious disputes, and as many as 70 percent are renegotiated during the first two years of the contract.

Like many problems, buyer dissatisfaction and unsustainable provider margins start at the negotiation table. Consider just a few of the dynamics at play:

  1. Apples-to-apples comparisons.
    Many deal-makers looking to create “competitive tension” among providers structure the RFP process on the assumption that if bidders each submit proposals for the “same thing,” then the buyer can simply choose the least expensive one. Unfortunately, buyers get the solution that is easiest to compare across providers, rather than the solution that best matches their needs and each provider’s unique strengths.



  2. Specialized buyer procurement teams facing off with specialized provider pursuit teams.
    As each organization brings its expert deal makers to the table, the focus becomes getting the deal done, rather than launching a relationship between two parties who need to work together for the next five or seven or 10 years. Negotiations between experts at buying and experts at selling leave out the critical role to be played by those who must implement the deal. Why do they get left out? Because they tend to ask difficult questions or say some troubling things. Both buyer and provider negotiators typically prefer to ignore challenges that might delay getting the deal done. After all, addressing those things in advance of signing can be expensive and time consuming, right?



  3. Reliance on contractual terms to protect you from what you don’t know or didn’t have time to figure out.
    Service level agreements can serve a useful purpose, and penalties have a role in a comprehensive governance model. But, they are not a substitute for difficult conversations about what are or are not realistic commitments, nor are they an excuse for avoiding responsibility for making sure that you monitor the things that matter and not just those things that are easy to measure.

Negotiating for implementation

To be successful, negotiators of outsourcing arrangements need to recognize that signing the deal is not an end in and of itself but must be a means to achieving important objectives—be they cost savings, transformation, innovation or improved service.

  1. Take advantage of the “hindsight” available to you.
    Either directly or through third-party advisors, you can gain insight into what goes wrong in outsourcing relationships. Ask the tough questions about challenges. Use this insight in your negotiations. Instead of assuming that your situation will serendipitously defy all odds, plan for how to deal with the difficulties that inevitably arise.



  2. Recognize that value creation begins, rather than ends, with the signing of the deal.
    While some negotiation and “closing” techniques may be debatable when you are focused on getting a favorable deal done, if your goal is implementation, things look a little different. For instance, while surprising your counterpart at the negotiating table may help you close a deal, it is counter-productive if your focus is implementation. Why would you want them to commit to something they wouldn’t have otherwise? The same can be said for keeping stakeholders in the dark throughout the negotiations. Not getting input from key stakeholders deprives you of potentially useful information and earns their resentment during implementation.



  3. Ensure a smooth hand-off.
    If while the ink is drying on the contract the procurement and sales teams are rushing off to their next negotiation and the implementation teams are just learning about the deal, you are setting yourself up for a rocky start. Even though the negotiation processes can take nine months, a remarkable amount of activity takes place in the last 36 hours. It’s essential that the people who negotiated the deal get everyone involved in its implementation up to speed on the contract, the mindset under which it was negotiated and the trade-offs that were made in crafting the final contract.

Competitive runners know that to win, you have to run past the finish line, not just to it. If implementation matters in the deals you negotiate, then getting them signed is not enough. You need deals that will actually deliver value when the parties begin their work together.

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